I would stay far away from the VIX. There is a very good reason why hedgies and large buy side firms won't touch it. The idea behind the VIX was in good spirit but short on practicality. This applies to both the options and the futures. A much better hedge would probably be to have some long Gold exposure.
As we have been working recently on this issue, IMHO whole thing is too complex for forum discussion, but some points are taken. Theres is one point however missed in Market Shock Events, which is October 87. The gap was really bad and happened at open. I know that a lot has been done since to prevent such scenarios. BTW interest rates went up one day later. See yourself...
I think many are still not understanding the use of futures in a Black Swan event. I am not trying to overhedge or trade to make money with the futures. They are a fast intraday hedge on a huge move to stop the bleeding so I can get out or adjust a position. Futures have unlimited risk but I am not adding, let's say, 50 contracts to a put spread position and just letting it run until expiration or overnight. If I slap on the hedge and the market quickly reverses and moves higher I take the hedge off and take a small loss. I am trying to preserve my capital and get out of the way of a crashing market. The unlimited risk is theoretical only because I am not putting these on to hold for weeks or even overnight. If the market starts falling hard and subways in 8 cities in the US were bombed I would short immediately and watch the charts after the hedge was put on. Hedges are not to turn the entire position into a profit, they are to reduce my losses so I can get out with as much capital as possible. This is not a martingale at all because I am not doublng up my position I am adding a partial hedge that responds directly to a crashing market. A martingale would be do roll down and double my position repeatedly as the market was crashing. Hedging a portfolio with S&P futures is not a novel or new idea at all. If the market reverses strongly I take the futures off for a loss and unwind my positions and ook for new entries. Remember that ES has a delta of .5 so I would never be able to overhedge any of my positions. It would only be a partial hedge. 50 contracts is worth $2,500 a point. If the market falls 20 points after the hedge it would be $50,000. On $300,000 worth of spreads this is hardly an overhedge, it is a partial hedge. If I slap on the futures and can close out my spread for a $150,000 loss then the futures also could be taken off for a net loss of $100,000. This cuts the loss by 33% and keeps a significant amount of my capital in place. An temporary drop of large sandbags into the breached hole to slow the flooding water so I can escape. That is the sole purpose. Not to turn the position into a net short futures position or make net money off the crash. One thing that I am most proud of is that I have tried my best to make my decisions now ahead of time, become confident in them and thus have no fear of the Black Swan. It is not so much about whether the VIX options or ES futures will work perfectly, it s about taking steps as best as I can to mitigate damages and knowing I will never blow up. Trust me, it is no false sense of security, it is just honesty. I cannot fear what I cannot control because it will interfere with my trading. I can only study the risk, understand it fully and either accept it and trade or fear it and choose another strategy. I have lost money in the past and it certainly sucks ass. But that was due to my stupid mistakes. That I fear more
I personally did not consider the London bombing a Black Swan event. It was a limited incident in another country, though tragic as it was. It would not compare to a 9/11 event which would truly kill the market in a short amount of time. I would rely on adjustments if needed in such an event because I would expect an immediate reversal of the knee jerk reaction. Also, the experience of the Madrid bombing helped and its effect on the market.
Just a caveat that I hope need not be mentioned. My discussion of using futures is due to my experience with the futures and not meant as a recommendation for people to use something they ar enot familair with or do not understand at all. For many it is not appropriate tool to use and I would not recommend it. It is quite a different ball game and not meant for the average retail trader. They also should not give one a false sense of security as they have their own pros and cons and complexity as well. It is a tool I am personally comfortable with but not comfortable recommending to just anyone. Trade what you know and know what you are trading...
Coach, Do you know TOS's policy on trading the futures after hours? For example if we get nuked, can I short the ES on TOS after the American Markets are closed? sd